SAP’s rising in New York

On August 3rd Europe’s biggest software firm will be listed on the New York Stock Exchange. What benefit will this bring to the thoroughly German SAP?

THE cranes that dominate the flat German landscape around Walldorf are testimony to SAP's success. The new buildings are being put up by a local property developer to provide accommodation for the legions of consultants who come to Walldorf to train and to pay homage to the 26-year-old firm that first defined, and now dominates, the booming market for software applications that tie together and automate business processes.

SAP, with nearly 9,000 customers in over 90 countries, has about 28% of the $15 billion market for so-called enterprise resource planning (ERP) systems. It is not in need of cash; so it will not be issuing new shares when it lists in New York. Even so there are some sound reasons for the listing. Around 35% of SAP's sales, which rose by 61% to $2.1 billion in the first half of 1998, are in the United States, and more than a fifth of its investors are there too. As Henning Kagermann, the company's recently appointed co-chairman, says: “It is a matter of improving investor relations and increasing visibility in our biggest market.”

It is also about giving the company's employees the reassurance that their recently granted stock-appreciation rights—a sort of option scheme that SAP felt obliged to introduce earlier this year to compete for talent against American rivals—are fully valued. Whether the New York listing will go further towards changing SAP's highly distinctive German culture is a matter of considerable debate inside the company.

In particular, employees wonder whether the pressure to hit the demanding quarterly targets set by Wall Street's army of analysts will erode the company's famous long-termism and meticulous engineering. Mr Kagermann argues that SAP has tried to operate as if it were listed in America since the beginning of the 1990s “in terms of the way we communicate results each quarter and the amount of disclosure we provide. We also know what it is like to be punished . Two years ago, the stock took a 35% hit when four major contracts were delayed.”

American investors will be keen to see whether SAP can sustain its stellar growth. Since the beginning of the year its share price in Frankfurt has doubled. And in the same period, the company has increased its headcount by 32% (to 17,000)—at some cost to margins—in order to meet the expected demand for its products. According to Chuck Phillips, an analyst at Morgan Stanley, an investment bank, revenue growth continues to beat expectations; investors, he says, are happy to ride with an industry leader gaining market share in one of the most attractive segments of technology.

That, in a nutshell, is why SAP attracts both envy and admiration. Despite all the excitement over the Internet, it is ERP that has revolutionised the way that big companies do business in the 1990s; and SAP has been in the vanguard of that revolution. The promise of ERP in general, and of SAP in particular, is to bring about the seamless integration of all the vital information that flows through a company—financial information, supply-chain information and customer information.

Before ERP, large companies struggled to blend incompatible systems into a workable whole while spending huge amounts of money on custom-made software that frequently failed to deliver what was expected of it. However, though ERP systems are “off the shelf”, they are amazingly complex and sophisticated pieces of software that typically require many months, sometimes years, to implement in full—a process that involves spending several times the cost of the original software. One estimate, by AMR Research in Boston, values last year's spending on what it calls the ERP Ecosystem—consulting, hardware, networking and complementary applications—at more than $35 billion.

Installing SAP's R/3 system has been described as the corporate equivalent of root-canal work. Although the vast majority of companies that have been through this purgatory have no doubt that the gain far outstrips the pain, there are still enough horror stories to make others think twice. American PC makers such as Dell and Apple Computer, which have a decentralised management or a free-wheeling culture, have either aborted or scaled down their SAP implementation.

Many believe that the only way to get the full benefit of R/3 is simply to submit to the SAP way of doing business. That means accepting a considerable amount of corporate re-engineering as the price of entry to a brave new IT world. However, in the latest issue of the Harvard Business Review, Thomas Davenport, a professor at Boston University, argues that companies may lose some of their uniqueness, and their competitive advantage, through squeezing themselves into the SAP mould. He says that managers should ask whether the system's technical demands coincide or conflict with their companies' business goals.

The biggest danger facing SAP may come from the Internet and the far-reaching effect that it will have on every aspect of business computing. The firm's rivals say that it has been slow to develop Internet-related software, and there may be some truth in this. But companies that have been through the ordeal of an SAP implementation will not easily be persuaded to switch horses. The firm says that the architecture of R/3 is sufficiently flexible for it to cope with any conceivable move towards the distributed sort of computing model made possible by the Internet.

A bigger dilemma may lie in SAP's attitude towards services—not a traditional strength of German companies. Although it is slowly expanding its in-house consultancy, SAP has stuck to working through partners—such as the consulting arms of the big accountancy firms. As long as ERP remains the hottest software game in town, SAP will have little need to boost its income from services. But in time, it almost certainly will. The more Americanised SAP becomes, the smoother that transition will be.